Gold Price - Where is it heading?

[ducati916]

From a variety of sources:

The Financial Times reports today that dealers, refiners and investors around the world are struggling to source adequate gold supplies. A trio of Switzerland’s largest dealers have announced production delays in recent days, while precious metals dealer Degussa announced that it is having difficulty filling customer orders, as daily demand is running at five times its average.

“There’s a disconnect between prices in the physical gold market and the prices you see on your screen,” Ronan Manly, analyst at Singapore-based brokerage BullionStar, told the FT. “I don’t think you will find a kilobar presently in Europe and the US for love nor money,” added Ross Norman, a long-time gold trader. “It’s quite extraordinary.”

However, re. Miners:

Newmont Mining, Inc. announced it is temporarily closing a quartet of mines in Canada and Peru on account of the virus and withdrawing financial guidance for 2020. Newmont now expects first quarter production of roughly 1.4 million ounces of gold, below the 1.6-million-ounce quarterly production schedule linearly implied by a full year target of 6.4 million ounces. On the day, Newmont shares rose 2.7%, lagging the 6.7% gain in the VanEck Vectors Gold Miners ETF.

jog on
duc

 

[ducati916]

But:

Before the opening bell, the Federal Reserve pledged to purchase Treasurys and mortgage-backed securities “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.” Minutes later, the Federal Reserve Bank of New York chimed in with plans to buy $75 billion in USTs and $50 billion in agency MBS each and every day, “subject to reasonable prices.”

For context, the Fed bought $75 billion in Treasurys per month under the so-called QE2 program of 2010 to 2011, and $40 billion of mortgage backed securities per month in the 2012 to 2013 QE3 program. The newly announced weekly pace of $375 billion of Treasury and $200 billion of MBS purchases would add roughly 15% and 18%, respectively, to the central bank’s current holdings of each asset class. That is, per week.

And that’s not even all. Beyond ramping up those existing strategies, the Fed is expanding its QE into different realms, announcing the establishment of a pair of facilities, one directly lending to new corporate debt issuers and the other to a so-called special purpose vehicle which will then purchase corporate bonds on the secondary market (issues must be rated investment grade by at least two agencies and mature in five years or less) as well as ETFs which “provide broad exposure” to the investment-grade bond market.

Step aside, Mr. Market. Uncle Sam is buying you out.

Gold (physical) will have a bid certainly while this enormous QE runs its course. The kicker is 'subject to reasonable prices', which is a subjective get out of gaol clause.

jog on
duc

 

[ducati916]

Update:

A second straight rip in gold took the yellow metal to $1,625 an ounce on the spot market this afternoon, near its recent $1,680 per ounce high and within 15% below its long-term peak reached in 2011.

Supply shortages owing to the widespread cessation of business activity play a key role. After yesterday’s announcement from Newmont Mining, Inc. (the world’s largest) that it was idling a quartet of mines across Canada and Peru, competitors have followed suit. This morning, Toronto-based Iamgold Corp. announced it has placed its Westwood mine under “care and maintenance”, while Eldorado Gold will minimize operations at the Lamaque mine in Quebec until April 13, maintaining only essential personnel on site. Yesterday, the South African government ordered mines to shut down for 21 days, while a number of refineries in Switzerland and Canada have also halted operations.

The acute shortage of physical gold has reached historic proportions, with COMEX futures for June delivery priced at a $57 premium to London spot prices this morning. According to Bloomberg, that’s the largest divergence between the most active contracts since 1980. “If you need to borrow gold in the OTC [over-the-counter] markets right now, you are going to pay a king’s ransom” commented Ole Hanson, head of commodity strategy at Saxo Bank.

While that tightening liquidity can be largely chalked up to supply and workplace disruptions resulting from the pandemic, Bill Fleckenstein, president and eponym at Fleckenstein Capital, tells ADG today that the unusual price discrepancies are symptoms of a fundamental problem:

The modern gold market is run, by design, on skimpy physical supply. In normal times, buyers of the physical metal can be overwhelmed by sellers of the paper product. That dynamic has been turned on its head.

Stateside, the extraordinary policy response from the Federal Reserve, which yesterday promised daily Treasury and MBS purchases on par with the monthly targets of prior QE programs, further stir the bullish zeitgeist. Yesterday, the yield on 10-year Treasury Inflation Protected Securities jumped to 0.8% from a post-2009 low of 0.5%, perhaps signifying renewed inflation expectations among the general investing public.

Supply will come back online, and liquidity conditions will improve as buyers and sellers return to the office. Yet the Fed’s increasingly broad-based market interventions are likely to remain, if history is any guide. Analysts at Goldman Sachs declared this morning: “We have long argued that gold is the currency of last resort, acting as a hedge against currency debasement when policy makers act to accommodate shocks such as the one being experienced now.”

They said it, so we don’t have to (again).

jog on
duc

 

[rederob]

As @peter2 noted, overnight there were crazy happenings for gold traders as the market went into brief backwardation.
Currently POG sits firmly around $1630 having consolidated over $1620 for the past 6 hours.

Expect more wildness as last night's volatility may be in part due to options expiration later this week, with many traders buying or selling to protect positions.
As many gold mines in the Americas and South Africa are closing due to COVID-19, Oz producers hold the whip hand in terms of meeting the physical supply shortage. Activities at the Perth Mint and with PMGOLD should offer some insights on impending physical supply shortages.

 

[rederob]

A thankful pause overnight with little price action as per the below 15 minute chart:

The standout was POG's strong price trading range with minimal volumes (unprecedented in recent years).
Current direction is sideways.
Consolidation for a few weeks would be welcome.
Based on volatility POG's near-term resistance level can occur any day.
With many nations having announced their stimulus packages we are getting near to the "new normal" on the economic front. However, until we see a flattening of the COVID-19 curve anything is still possible.

 

[rederob]

Gold and the 1929 Crash Aftermath
For simplicity, Homestake Mining is used as a surrogate for gold stocks.
Homestake Mining rose continuously from $80 in October 1929 to $495 per share in December 1935 - a total return of 520% excluding dividends. Over the next six years Homestake paid out a total of $128 in cash dividends (the 1935 dividend alone was $56 per share).

Gold and the 1973/1974 Market Crash
From the market high in 1973 to its low in 1974 the DJIA and the S&P 500 each lost almost half their value, while previously high-flying technology stocks plummeted more than 60%.
The Gold Mining Index, composed of ASA, Campbell Red Lake and Dome Mining, appreciated more than 260% from its 1973 low (40) to its 1974 high (147).

Gold in Present Perspective
We entered a new bull market for gold last June and, despite some recent extreme volatility, the trend remains solid in an otherwise crumbling marketplace for everything else.

Key points

• Unlike fiat money, gold cannot be created from nothing
• It has weathered the recent storm of equity markets
• It has a history of outperformance of other market segments after financial system meltdowns
• On current trend we are a long way from the pace of advance evident from the last bull run.

Investors worried about preserving capital should take note of what has happened in the past in respect of gold. It's no guarantee it will happen again. But this time there is a slight difference. COVID-19 had nothing to do with gold entering a new bull market phase. Gold was likely to do well into coming years irrespective. COVID-19 instead provides the perfect ingredients to propel this bull market higher, faster.

 

[Movendi]

The problem is you can't buy the physical stuff anywhere. And the paper stuff doesn't appear to be a true account of the physical backing.
So where do you invest in gold that won't be subject to counter party risk?

 

[rederob]

The problem is you can't buy the physical stuff anywhere. And the paper stuff doesn't appear to be a true account of the physical backing.
So where do you invest in gold that won't be subject to counter party risk?

Producers listed on stock exchanges have the "physical" metal, apart from other parties/individuals who have bought the metal and put it storage.
So I would be looking for low cost producers with large reserves and minimal hedged output. However, until Australia makes some clear announcements about how far lockdowns will go, I am refraining from buying and equities.
A separate thread discusses PMGOLD, where the Perth Mint backs your holding with physical metal - worth considering.

 

[ducati916]

The problem is you can't buy the physical stuff anywhere. And the paper stuff doesn't appear to be a true account of the physical backing.
So where do you invest in gold that won't be subject to counter party risk?

Precious metals prices on Friday closed lower. Gold fell back as physical demand concerns eased and as silver fell on concern that industrial metals demand will suffer as the coronavirus pandemic continues to spread.

Gold prices on Friday fell back on reduced concerns about the availability of physical gold supplies after the London Bullion Market Association said gold suppliers are in talks to use chartered or cargo flights to transport gold to different delivery points across the globe. Gold prices earlier this week saw strength on tightness in the physical gold market. NY Comex gold futures on Tuesday jumped to the highest premium since 1980 against London gold due to tightness of gold in the physical market. Switzerland's gold refining industry, a major hub for processing gold into bars and coins, has largely shut down because of the coronavirus pandemic and airlines around the world have cut back on flights, leaving gold dealers unsure of whether they'll be able to transport bullion around the world to satisfy delivery obligations.

jog on
duc

 

[ducati916]

Gold and the 1929 Crash Aftermath
For simplicity, Homestake Mining is used as a surrogate for gold stocks.
Homestake Mining rose continuously from $80 in October 1929 to $495 per share in December 1935 - a total return of 520% excluding dividends. Over the next six years Homestake paid out a total of $128 in cash dividends (the 1935 dividend alone was $56 per share).

Gold and the 1973/1974 Market Crash
From the market high in 1973 to its low in 1974 the DJIA and the S&P 500 each lost almost half their value, while previously high-flying technology stocks plummeted more than 60%.
The Gold Mining Index, composed of ASA, Campbell Red Lake and Dome Mining, appreciated more than 260% from its 1973 low (40) to its 1974 high (147).

Gold in Present Perspective
We entered a new bull market for gold last June and, despite some recent extreme volatility, the trend remains solid in an otherwise crumbling marketplace for everything else.

Key points

• Unlike fiat money, gold cannot be created from nothing
• It has weathered the recent storm of equity markets
• It has a history of outperformance of other market segments after financial system meltdowns
• On current trend we are a long way from the pace of advance evident from the last bull run.

Investors worried about preserving capital should take note of what has happened in the past in respect of gold. It's no guarantee it will happen again. But this time there is a slight difference. COVID-19 had nothing to do with gold entering a new bull market phase. Gold was likely to do well into coming years irrespective. COVID-19 instead provides the perfect ingredients to propel this bull market higher, faster.

This chap thinks gold is in for a retracement. He is another 'chart' analyst and CFA.



What think ye of that?

jog on
duc

 

[finicky]

What think ye of that?

Too messy

 

[rederob]

This chap thinks gold is in for a retracement. He is another 'chart' analyst and CFA.
What think ye of that?

I don't discount any possibility.
But I prefer to look at what is more probable.
Here's a look at now and then:

For the record, POG got smashed down around $250 after peaking on 9 March 2020, which is about the same as POG fell after Lehman's collapsed in 2008.
My view is that the main difference now is that physical production is being curtailed at many mines and 3 gold refineries, due to COVID-19. This could get a lot worse, meaning that paper gold holders might get very badly burned by not being able to back their contracts with physical - a situation that spooked the market earlier this week.
I have not followed the gold market long enough to know if there was a precedent but, from a global perspective, I doubt it.
Until the likelihood of further production curtailment is behind us, this is a dangerous market to play in.
I will do here what I have done for a while and take each day as it comes, chart it, and see if it makes sense.

 

[sptrawler]

Several years ago there was talk that China was buying all the gold it could lay its hands on, is that still the case. It was suggested that China may push for a return to the gold standard and if that came about the price of gold would go through the roof, is that train of thought still around.
I don't hold, but am interested.

 

[ducati916]

1. I don't discount any possibility.
But I prefer to look at what is more probable.

Here's a look at now and then:


2. For the record, POG got smashed down around $250 after peaking on 9 March 2020, which is about the same as POG fell after Lehman's collapsed in 2008.

3. My view is that the main difference now is that physical production is being curtailed at many mines and 3 gold refineries, due to COVID-19. This could get a lot worse, meaning that paper gold holders might get very badly burned by not being able to back their contracts with physical - a situation that spooked the market earlier this week.

4. I have not followed the gold market long enough to know if there was a precedent but, from a global perspective, I doubt it.

5. Until the likelihood of further production curtailment is behind us, this is a dangerous market to play in.

1. You say 'probable'. What makes it more probable? Not a chart. That is 50/50 or 33/33/33.

2. Accepted. Are you equating the LEH experience with this? I can certainly see parallels, but there are also significant differences.

3. The (main) difference being lack of physical supply. This is actually not an issue at all. If all gold production just stopped because there was simply no more gold to be mined: then all that needs to take place is that gold reprices higher to accomodate that reality. There is never 'not enough gold (money) to meet needs.

4. There has been, although it was in the silver market and the Hunt brothers. https://en.wikipedia.org/wiki/Silver_Thursday

5. Well that of course is your opinion and you may well be correct in that. Then again, it may well be a very lucrative trade if you get in/out correctly.

So:

(a) We now have as much QE in a single day as we had in a month.

If debt is a driver: then with an unprecedented expansion in debt, why has gold meandered? It should have gone past its previous high to new highs...which by my definition would be a 'new bull market'. Currently I would define it as a bounce from the last bull market and current bear market.

(b) COVID-19: is (likely) to be temporary and its effects will pass. Its effects are however effectively twofold (i) infection and morbidity and (ii) the economic effects as a result of (i) and quarantine.

The economic effects are essentially:

(i) loss of production;
(ii) bankruptcies;
(iii) loss of employment;
(iv) liquidity issues in banks (addressed via QE).


The loss of production will create (possibly) short term inflation, although, in saying that in the last 4 days that we have been quarantined in NZ, I haven't spent any money...unheard of, so currently, even in the face of falling supply, demand is falling even faster resulting in an increasingly deflationary environment.


Deflation is not a great driver of gold price appreciation.

jog on
duc

 

[ducati916]

This is an interesting post, because certainly the 1929 - 1933 period was one of severe deflation. The inference being that gold is an effective hedge in a deflationary environment.

Gold and the 1929 Crash Aftermath
For simplicity, Homestake Mining is used as a surrogate for gold stocks.
Homestake Mining rose continuously from $80 in October 1929 to $495 per share in December 1935 - a total return of 520% excluding dividends. Over the next six years Homestake paid out a total of $128 in cash dividends (the 1935 dividend alone was $56 per share).

Using an individual stock as a proxy for an entire sector is not really a valid way to proceed. Individual (mining) stocks as opposed to say an ETF of mining stocks can have very different drivers for price appreciation (or depreciation).

For mining stocks there would (could) be the following factors that would (should) be taken into account:

(a) life of the mine; and
(b) annual output; and
(c) production costs; and
(d) selling price.

The price appreciation of Homestake was due to two factors that were instrumental in increasing its earnings over the 1930-1932 period and beyond.

(i) Homestake increased the quality of its mined ore.


Grade of Ore (yield in $/ton)
1923 - 3.87
1927 - 4.87
1928 - 4.63
1929 - 4.53
1930 - 6.18
1931 - 6.36
1932 - 7.07

Revenue (net earnings) in '000
1923 - 2,275
1930 - 3,307
1932 - 4,838

The tonnage mined (milled) in 1932 was the same as that mined (milled) in 1926. The increase in earnings was due to improved ore quality.

The second factor was that on March 8 1933 Roosevelt passed the Emergency Banking Act 1933 which prohibited the export or holding of gold, requiring its surrender, by the public, Gold Reserve Act 1934 (https://en.wikipedia.org/wiki/Gold_Reserve_Act) creating a higher price of $35/oz.

Now this second factor would have held true for all gold mining companies including Homestake.

Homestake's net earnings (in '000) in 1938 were $10,605, a significant increase from 1932 when gold was still $20.67/oz, which would have been reflected in the share price.

jog on
duc

 

[rederob]

My responses to your points are in blue;

1. You say 'probable'. What makes it more probable? Not a chart. That is 50/50 or 33/33/33. The cost of production is likely to exclude the fall being as deep as charted, and even it was to happen, the correction would be incredibly sharp. For example, NCM without Cadia is not profitable at $1200/oz.

3. The (main) difference being lack of physical supply. This is actually not an issue at all. If all gold production just stopped because there was simply no more gold to be mined: then all that needs to take place is that gold reprices higher to accomodate that reality. There is never 'not enough gold (money) to meet needs. You have invented a non-current scenario. The present situation relates to the difference (spread) between paper and physical.

4. There has been, although it was in the silver market and the Hunt brothers. https://en.wikipedia.org/wiki/Silver_Thursday True, but Central Banks hold gold, not silver.

5. Well that of course is your opinion and you may well be correct in that. Then again, it may well be a very lucrative trade if you get in/out correctly. I am principally commenting on gold as an investment strategy, and put trading to one side as I don't like the idea of "luck" predicating money allocation.

So:
(a) We now have as much QE in a single day as we had in a month.
If debt is a driver: then with an unprecedented expansion in debt, why has gold meandered? It should have gone past its previous high to new highs...which by my definition would be a 'new bull market'. Currently I would define it as a bounce from the last bull market and current bear market. The implications of debt are not instantaneous, as it is insidious. Until we are in recovery mode we won't see who is capable of surviving what they have been burdened with. In the meantime, the knowledge that gold has not been destroyed by this crisis places it in a league of its own as an asset class. My thesis is that until this debt burden has been lifted then gold will continue to ascend as fiat currencies will be comparatively weak. We can compare notes again in 2025.

 

[IFocus]

Thanks gents for the discussion

 

[rederob]

The below chart is a continuation of Sunday's but hones in on the recent action, showing a probable consolidation period a step higher than that which ran from early January to 18 February:

Visibly evident from the consolidation periods is the new era of price volatility we exist in, which commenced around 24 February. Previously gold would typically trade within a $3 range over half an hour, whereas lately its regularly greater than $10.

This chap thinks gold is in for a retracement. He is another 'chart' analyst and CFA.

I just enlarged the chart and it was as at 14 February. It showed an immediate rapid downward movement yet, in reality, the price actually rose by about $120 over the next 3 weeks. That's a significant fail!
Is there an update?

 

[ducati916]

I just enlarged the chart and it was as at 14 February. It showed an immediate rapid downward movement yet, in reality, the price actually rose by about $120 over the next 3 weeks. That's a significant fail!
Is there an update?

Well an update of sorts:



So I'm guessing he's still short.

jog on
duc

 

[rederob]

The below chart for the past month is an extension of the trend channel beginning August 2018 from this post:

The price range in March was $250, and the recent range (shaded brown) has clearly narrowed substantially: although at $90 over the last fortnight you can appreciate there remains a lot of volatility.
Those using other charting signals are welcome to add what they think is going to happen next.
I don't know.
Volumes are subdued.
Until the COVID-19 death rate in the USA has peaked, I am reckoning on a very fickle market.